Eight investment lessons from Game of Thrones

Millions of people will be gripped by the battle for the Iron Throne in the final season of Game of Thrones. As the fantasy saga enters its final phase, Liontrust fund managers highlight eight investment lessons from key characters in Westeros.

“Winter is Coming” Ned Stark

Government bond markets have enjoyed a long summer, with a combination of fear and, more importantly, technical factors driving yields to levels where they are now ridiculously expensive in absolute terms and even more so when adjusted for inflation. ‘Winter is coming’ but when will it begin?

Technical demand plus fund managers ‘chasing’ the market lower has created a powerful self-sustaining loop that means that the last days of summer could drag on for some time yet. When winter does inevitably come – with yields adjusting upwards – we will use the flexibility afforded by our strategy to target alpha through credit selection, duration management and sector allocation.

“Most men would rather deny a hard truth than face it.” Tyrion Lannister

While awareness of plastic pollution and how to tackle it has quickly ascended the list of global priorities in recent years, other hard truths such as the need for better resource efficiency, global health issues, and the improvement required in supply chains remain under-reported. We believe that the market ignores these hard truths and underestimates the pace of change in companies which are helping tackle these issues. In a fast-changing world, the companies that will survive and thrive are those that improve people’s quality of life, drive improvements in the efficiency with which we use increasingly scarce resources, and help to build a more stable, resilient and prosperous economy. Sustainable investment is not only for investors who want their investments to “do good” and benefit society. We believe there is also a compelling investment case for all investors to take this approach.

While no investor would want Ygritte’s accusation thrown at them, it’s also true that attempting to know everything can be pretty counter-productive. As a fund manager you are constantly bombarded with information; there is so much data and research available, that you couldn’t possibly look at everything that comes across your desk. Trying to analyse too much information can in fact risk ‘confirmation bias’, where you keep sifting through information until you inevitably find something that supports your preconception regarding an investment and attach more importance to that item than it deserves, leading to overconfidence in your convictions. For 20 years the Economic Advantage process has by design introduced discipline and structure to stop us falling into this trap. Recognising that “you know nothing” about the future and instead planning for a range of contingencies is sage advice for us all.

“The storms come and go, the waves crash overhead, the big fish eat the little fish, and I keep on paddling.” Varys

In my 30-plus years of investment experience I have seen the sector develop at a rate of knots; from an industry of 806 funds in 1985 to a staggering 3,952 today (source: Investment Association), we’ve come through RDR (Retail Distribution Review), MiFIDs I and II, countless market setbacks and two market crises. What I’ve learnt over three decades is that patience is key – in fact it’s a cornerstone of our investment philosophy. We put suitability, transparency and value for money at the heart of any investment decision and keep away from the noise. So while the world – or the country at least – remains focused on Brexit, we note that market historians tell us politics rarely has a long-term effect on investment performance. The only thing that is constant in life is change – embrace it.

The prospect of waking dragons might seem to have little relevance for international investors, many of whom are instead worried that China’s dragon economy risks slipping into a slumber. In our view these fears are unfounded. China has the largest economy in the world when measured in purchasing power parity (PPP) GDP terms, ahead of the US and greater than the combined EU members. Its own economic growth target may have been reduced from 6.5% to 6.0%, but it is still expected to contribute around half the growth of the global economy this year. China is undergoing a necessary, long-term economic slowdown and transition but it remains the biggest driver for investors in Asia.

“A lion does not concern himself with the opinion of sheep.” Tywin Lannister

We are Macro-Thematic investors. Our process entails identifying the kind of long-term trends that others have bypassed. Oftentimes, this demands that we roll up our sleeves and delve amidst companies that consensus regards as unattractive. The clearest illustration of this is our current strategic tilt to ‘value’ companies. Thanks to a decade of low rates and quantitative easing, the valuation spread between ‘value’ and ‘growth’ companies is at all-time highs. Buying value stocks has never been more attractive, particularly when the long-run returns data tells us that value beats growth over time. This unprecedented opportunity explains many of our key thematic overweights, from the miners of Scarce Resource basket to the banks of our Rising Rates play.

“The heart lies and the head plays tricks with us, but the eyes see true.”Syrio Forel

Perhaps Syrio had company cash flows in mind when he said this. We find that often the desire to forecast company earnings can be dangerous to investors’ wealth. It is so often beset by our emotional extremes of optimism and pessimism – as Forel councils us ‘the heart lies and the head plays tricks with us'. Instead a more reliable guidance for future profitability and share price return is provided by close scrutiny of recent cash flows – 'the eyes see true'.

Volatility is a frequently quoted metric for equities. While volatility does spike during bouts of chaos such as the credit crunch, most rational investors wouldn’t view it as ‘a pit’ but rather a desirable feature of functioning markets! The global quantitative easing programmes that have flooded financial markets with liquidity over the last decade have smothered volatility and encouraged smooth asset price inflation. In our view this absence of chaos is completely fabricated and unsustainable, and therefore should be a cause of concern rather than celebration. The return of volatility could prove to be ‘a ladder’ to better returns for discerning stock pickers. Olly Russ, European Income team

For a comprehensive list of common financial words and terms, see our glossary here.

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from it can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This Blog should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust.

Monday, April 15, 2019, 11:43 AM

Our funds

We have eight fund management teams. Five of the teams invest in UK, European, Asian and Global equities, one team invests in Global Fixed Income and we have a Sustainable Investment team that offers equity, fixed income and managed funds. Our eighth team manages target risk, Multi-Asset portfolios.